Funds With $100 Billion May Be Too Big to Fail, FSB Says

The report addresses “the risks to global financial stability and economic stability posed by the disorderly failure of financial institutions other than banks and insurers,” Mark Carney, Bank of England governor and FSB chairman, said in the statement. Photographer: Chris Ratcliffe/Bloomberg

Jan. 9 (Bloomberg) -- Investment funds that manage more
than $100 billion in assets may be labeled too big to fail,
global regulators said, as they seek to expand financial
safeguards beyond banks and insurers.

Hedge funds with trading activities exceeding a set value
of $400 billion to $600 billion would also be assessed by
national authorities to gauge whether they need extra rules
because their collapse could spark a crisis, the Financial
Stability Board said in a statement yesterday.

The report addresses “the risks to global financial
stability and economic stability posed by the disorderly failure
of financial institutions other than banks and insurers,” Mark
Carney, Bank of England governor and FSB chairman, said in the
statement. “They are integral to solving the problem of
financial institutions that are too big to fail.”

The FSB, which brings together regulators and central
bankers from the Group of 20 nations, is ranking banks and
insurers by their potential to cause a global meltdown and
demanding bigger financial cushions to avert a repeat of the
2008 credit freeze. Industrial & Commercial Bank of China Ltd.,
the world’s most profitable lender, was added to the FSB’s list
of too-big-to-fail banks in November. Insurers such as American
International Group Inc. and Allianz SE were deemed systemically
important in July.

Systemic Risk

“Unlike banks and insurance companies, asset managers do
not invest on a principal basis and do not take on balance-sheet
risk,” said Dan Waters, managing director of ICI Global, a
worldwide lobby group for the fund-management industry.

“Regulated funds and their managers have not been and are
highly unlikely to be a source of systemic risk,” Waters said.

Finance companies that provide business funding, personal
loans, store credit and car loans may also be considered crucial
for stability because of the “potential difficulty of
substituting certain types of finance to the real economy that
they provide,” the FSB said in the report, which was produced
with the International Organization of Securities Commissions, a
Madrid-based group of supervisors from more than 100 countries.

As much as 80 percent of all assets outside of the banking
and insurance industries are in the hands of such finance
companies, broker-dealers and investment funds, according to the
FSB.

While yesterday’s report proposes how to classify companies
as systemically important, the FSB said possible measures to
defuse the risks they pose to the financial system “will be
taken at a later stage.”

The board, based in Basel, Switzerland, said it will seek
opinions on its proposals until April 7.